5 Graphs For 2016: Midyear Update

At the beginning of this year, I identified graphs of 5 aspects of the economy that most bore watching. Now that we are halfway through the year, let's take a look at each of them.

#5 The Yield Curve

The Fed attempted to embark on a tightening regimen last December. The question became, would the yield curve compress or, worse, invert - an inversion being a nearly infallible sign of a recession to come in about 12 months. It turns out that the weakness in the world economy has caused something of a compression just from the long end:

Rates on 2-year Treasuries rose in advance of the Fed's move in November, but have since fallen to their pre-December range, while the 10-year Treasury has fallen to all-time lows (typically, long rates only start to fall once the tightening cycle has caused the economy to weaken). At 0.86% as of last Friday, however, the yield curve is still quite positive when seen in a historical perspective.

Weakness in the economy has put the Fed back on hold, meaning it will be very difficult for the yield curve to actually invert.

#4 The trade-weighted US$

Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US$ that began in late 2014, which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.

Here, there has been a big change:

Against all currencies, the US$ has recently been in the range of +3% to +6% YoY - a more typical, if still elevated, range. Against major currencies, the US$ has actually declined YoY. This is good news.

#3 The inventory-to-sales ratio

An elevated ratio of business inventories to sales means businesses are overstocked. This has frequently, but not always, been associated with a recession. I have been using the wholesalers inventory-to-sales ratio, since it has fewer secular issues. While the ratio increased in January, it has fallen slightly since then:

This is not objectively "good," but this kind of slow fall tends to happen as a recession is close to ending.

#2 Discouraged workers

While 2015 saw a big improvement in involuntary part-time employment, this trend has completely stalled in the last 9 months:

We are still at least 1,500,000 above a "good" number.

#1 Underemployment and wages

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s and even in the latter part of the early 2000s expansion. In this expansion, however, nominal increases have averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power. There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part-time workers.

This expanded "U6" unemployment rate (minus 10%) is shown in blue in the graph below, together with YoY nominal wage growth (minus 2%)!:

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate. U6 is now 9.6%, and there has been some mild improvement off the bottom. More than anything, the US needs real wage growth for labor, and the present nominal reading of 2.5% still isn't nearly good enough. With the expansion in deceleration mode past mid-cycle, it is not clear at all how much further improvement we are going to get before the next recession hits.